Tag Archives: ECB

Investors refuse to believe that shock lies in wait…Investors do better where risk management is a conscious part of the process…survival is the only road to riches. Let me say that again: survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival…You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing. – Peter Bernstein

James Grant Discusses the Folly of Fed Policy

CNBC Money Honey:The Federal Reserve is reportedly considering a new bond buying program to bolster the economy. The Wall Street Journal said the plan would buy more mortgage or treasury bonds, but borrow it back for short periods at lower rates. My next guest says such a plan would do more harm than good. James Grant from Grant’s Interest Rate Observer (www.grantspub.com) and Kelly Evans from headquarters are with me today. Good to see you, Jim. thank you so much for joining us.James Grant: Good to see you.

CNBC: You say such a plan by the Feds would be a wrong approach.

James Grant: We’ve had the easy money now for several years. What do you think the implications of it is? we should call this what it is, it is market manipulation, that’s what we call it in the private sector. What the Fed is doing is manhandling the structure of interest rates to the end of achieving of what it takes to be desirable macro outcomes. If the government would go down to the farmer’s market at 14th street and fiddle with the scales, there would be an understandable outcry from the customers. But the Fed and Central Banks the world over are in unprecedented ways of manipulating the value of what they’re printing, by a ton. In the latest gambit, the Fed wants to manipulate long-term interest rates lower. But in so doing, it is manipulating perceptions of risk, and it is creating a real inflation in the sense that people who want to retire in their savings, need much more cash to do it.

CNBC: And I like your latest cartoon, stick ’em up, this is a debt swap. Yeah. in the latest grant interest rate observer, in terms of the inflationary story, we’ve been talking about the threat of inflation after a long time with this easy money.

James Grant: I want to get into the ECB (European Central Bank) as well, because it’s not just the Fed. have we seen inflation yet? there’s inflation certainly in spots–obviously commodity inflation. But there’s also inflation, I think, in market assets that are stimulated, to use that favorite word of the authorities, stimulated by ultra-low interest rates. For example, in the distressed debt markets, you’ll find companies that have not made a profit in five years, issuing debt, as if this company were somehow soundly and demonstrably solvent. by pressing down interest rates, by repressing interest rates, the Fed is in effect dulling the risk sensors of the entire marketplace. Is this good? it’s the question to ask, Kelly. And the reason so many people are focused on the drawback of these record low interest rates and the fact that it’s also punishing savers.

CNBC: I’m curious, it may not amount to anything, but Jim, if the Fed goes this route of sterilizing its quantitative easing, and if they do another round, what does that mean to you?

James Grant: Why would they pursue that kind of action–lend long, in other words, which is in the private sector, a great way to go broke, as a bank. The Fed is going to do this. It thinks — the Wall Street Journal is floating this balloon. The Fed doesn’t want to have us believe that it is recklessly printing money to do that, ergo the gambit of locking up the funds with which this buys the bonds.

CNBC: Kelly, it looks like nothing more than what we’ve seen. It’s the Fed interposing itself between the marketplace and — Jim, it’s an overture to people like you who think the Feds are creating inflation. Do you read a message like that and feel comforted somehow that —

James Grant, “No, I am distinctly uncomforted, Kelly. The Fed is creating, if not inflation, it is creating distortions. What has the Fed got against the price mechanism? it’s got in this country a long way over 200 years, suddenly, wherever the market sells off, we somehow have to have a fed interjection of money. What about the ECB? We’ve got the European Central Bank allowing a three-year period where the banks can pay back the lending. What are they doing with that money? They’re actually buying sovereign debt longer term. What about the ECB action? The ECB is going through a kind of adolescent growth spurt. Its balance sheet is positively exploding. its balance sheet is the equivalent of $4 trillion. It’s one-third larger than the Fed’s. Although the Euro zone has an economy about 13% or 15% smaller than ours. The Fed is a piker compared to what the ECB has recently been doing. I think the point is, the world over we’re seeing unprecedented things (the beginning of the end of fiat currencies). We’re seeing interest rates that are lower than ever, and central banks that have never been more recklessly pro creative, to use Warren Buffett’s words, about assets. They’re printing money like mad. And people can’t seem to get enough long-term bonds, because the central banks are manipulating expectations about the future of interest rates. I think it’s all very dangerous. We can draw lessons from the depression of the 1920s, but what are the actual consequences of this continued government intervention?

Can we talk about what happened in early 1920s? Ben Bernanke can’t stop talking about the ’30s. But in 1920, ’21, the economy fell off the cliff. Nominal GDP was down 29%, wholesale prices collapsed by 40%. you know how the Fed and the Treasury reacted to this, the Treasury balanced the budget and the Fed actually raised interest rates. Guess what, the depression ended.

James Grant: We keep on hearing this propaganda stick drum beat assertion that in order to get us out of our sorrows, the authorities, the high and mighty ones, say we must run immense deficits.

Article 1, Section 8 of the U.S. Constitution gives the Congress the power to COIN money and FIX the standard of WEIGHTS and MEASURES. The Constitution was not intended to give government (the Fed) the power to constantly change the yardstick of money (changing the quantity of money). Also, the Fed interferes with the traffic signals of the economy–interest rates–by keeping the traffic light at green constantly. This will only lead to more mal-investment.

We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.–Warren Buffet

Good Journalism: Relentlessly Asking the Critical Question

Oh no, an Irish journalist, Vincent Browne, asks ECB bankster, Klaus Marsuch, about the ELEPHANT in the room. Browne asks, “Why do Irish people have to pay billions to a DEFUNCT bank to bail-out UNGUARANTEED bank bondholders?” Say it ain’t so! Do you think the bankster answered his question?

Question to Readers: “If central economic planning has been shown to repeatedly fail as shown by North Korea, Cuba, Soviet Russia, Eastern Europe, etc., why do Americans and Europeans tolerate a CENTRALLY planned financial system ruled by the FED and the ECB? Why tolerate a perpetually flawed financial system?

Propaganda on the Crisis

Treasury Secretary Timothy Geithner charged in a Wall Street Journal op-ed that those who oppose the Obama Administration’s regulatory regime for the financial services industry “seem to be suffering from amnesia about how close America came to complete financial collapse under the outdated regulatory system we had before Wall Street reform.” Au contraire, Secretary Geithner, it is you who choose to ignore and misrepresent the lessons of the financial crisis by perpetuating the myth that the source of the crisis was a lack of regulation.

Franchise Studies

There are some readers here who are only interested in the nitty-gritty of individual companies. They study the accounting and the competitive advantages of their companies. That is good. Those readers will become good investors. Later today, I will post the world’s greatest analysis of a company. And we will begin our study of franchises and competitive advantage.

I think we all need to see the mountain top to know what to strive for. I will put the cart before the house by posting 5 franchise companies with a short description of their alleged competitive advantages. Within four months we will have about 100 companies in our data base.

We will also begin discussing the case studies in Bruce Greenwald’s excellent book, Demystifying Competition. Please go to the Value Vault (just email aldridge56@aol.com with VALUE VAULT in the subject line, and I will email you a key–please use the materials for your own use) and read this book a few times, take notes and think about the cases.

Economics Question

Now, there may be other readers who are actually interested in Austrian economics and are also value investors. For you I pose a question, “Why is it NO SURPRISE to see the markets higher this morning and what is the ECB actually doing? Answer to be posted this afternoon.